Moody's says SMIC's latest investment infusion is credit positive

Moody's Investors Service says that the announcement by Shanghai Integrated Circuit Investment Fund (SICIF) that it will be investing a total of RMB20 billion in Semiconductor Manufacturing International Corporation (SMIC) as well as two other Shanghai-based semiconductor manufacturing companies is credit-positive* for SMIC. SMIC is the leading semiconductor foundry service provider in China, providing integrated circuit foundry and technology services with manufacturing technologies supporting 0.35 micron to 28 nm.

"SICIF's investment will strengthen SMIC's financial capacity, which will in turn enhance SMIC's competitiveness by allowing the company to expand its capacity and develop more advanced technologies," says Lina Choi, a Moody's Vice President and Senior Credit Officer.

Moody's points out that SICIF's investment announcement on 18 January 2016 is part of SICIF's aim to designate RMB30 billion for investments to support the semiconductor manufacturing and equipment industries in the Yangtze River Delta in China. Moody's estimates that of the RMB20 billion set aside for the three Shanghai-based semiconductor manufacturing companies, the amount to be invested in SMIC will be substantial, and will total at least RMB5 billion. 

Such an injection of funds would be particularly timely for SMIC, because it would help fund its ongoing capacity expansion for 28 nanometer products, and the construction of new 12-inch wafer fabrication facilities. Moody's notes that SMIC's foundry business is capital intensive. An estimated RMB9 to RMB10.5 billion in capital expenditure was spent in 2015 to grow its business. 

Moody's further points out that the investment by SICIF in SMIC represents local government support to SMIC, and is in additional to the central government support provided to the company in February 2015, when the China National Integrated Circuit Fund invested US$400 million in SMIC. Moody's considers the national and local government investment in SMIC evidence of the company's strategic importance to China's integrated circuit industry.

According Gartner, China is currently the largest market for semiconductor components and accounted for 57% of global consumption in 2014. The majority of this demand was met by imports because of the insufficient local supply. Further, the China Semiconductor Industry Association estimates that the consumption and production gap reached US$120 billion in 2014. In view of the insufficient supplies locally, the Chinese government has made the continued development of a local integrated circuit industry a priority.

The integrated circuit design sector in China will continue to grow at a compound annual growth rate of 20.1% over the next five years, according to the IEEE Conference on Wireless Sensors and the China Semiconductor Industry Association. Such a pace is three times that of the global CAGR of 6.6%. SMIC has established customer relationships with home-grown players in the integrated circuit design industry and stands to benefit from the sector's higher growth rates, Moody's said.

*The principal methodology used in this rating was Semiconductor Industry Methodology published in December 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.